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From E-commerce to E-governance of Online Space under GST?

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

Rajeev Dimri
1
BMR &
Associates LLP

Rajeev Dimri is Leader, Indirect Tax, BMR &
Associates LLP

The recently-passed Model GST Law aims to create a more amenable business environment
for India. The law gives particular attention to the growing e-commerce sector, and
the following article considers these changes, and what they will offer, and require
of, taxpayers.

Goods and Services Tax (“GST”), anticipated to be the most powerful tax reform ever
to take place in India, has the ability to alter the entire indirect tax environment
for businesses in the country. With GST coming at a time when companies are largely
moving towards embracing digital technology and having an online presence, it is imperative
that the GST law specifically addresses various tax issues being presently faced by
the e-commerce sector under the current tax regime. The existing tax laws are highly
deficient when it comes to taxation of offerings in and through digital space. Be
it taxation of electronic supplies, intangibles or online intermediaries, the arena
is filled with disputes. The greatest challenge being faced by various e-commerce
players presently is the levy of taxes on behalf of the suppliers operating through
their platform.
This goes against the overall spirit of these businesses who intend to operate only
a channel connecting various suppliers and recipients and not supply goods/services
on their own account. The debate on this aspect between various e-commerce players
and the tax department seems to be far from its conclusion under the present regime.

The Model GST Law, which lays down the broad contours of the GST framework, was released
on June 14, 2016. On the first reading of the Model GST law itself, one can notice
that a separate chapter has been dedicated to e-commerce. This clearly brings out
the inclination of the Government towards recognizing the latest emerging business
models and according them special status for taxation purposes. This should hopefully
bring in an era of clarity for e-commerce businesses as well as tax department involved
in a constant tussle with each other due to inadequate taxation laws.

The e-commerce chapter under the Model GST Law defines certain key terms including
“aggregator” and “e-commerce operator.” “Aggregator” has been defined as a person
who owns an electronic platform by means of an application/communication device and
enables a potential customer to connect with the service provider under the brand
name of the aggregator. This definition seems to include various app-based services
within its ambit where services are provided by individual service providers under
the brand name of an “aggregator.” While the definition of aggregator largely remains
same as the one existing in the present law, for the purpose of the GST law, the aggregator
has been deemed to be the supplier of the service. This is in slight contrast to
the present provisions, which make an “aggregator” liable to pay tax as a service
recipient under the reverse charge mechanism. This can be seen as a positive move
as it should address the issue of blockage of input tax credits for the aggregator,
which could not have been utilized for payment of tax under the reverse charge mechanism.

Similarly, “e-commerce operator”
has been defined as every person who directly or indirectly owns or manages an electronic
platform that is engaged in facilitating the supply of any goods or services but does
not include a person who supplies such goods and services on its own behalf. This
definition seeks to cover various e-commerce players through which goods/ services
are supplied. The purpose of providing a separate definition for aggregator and e-commerce
operator appears to be for prescribing different tax compliances for an aggregator
and e-commerce operator. While an aggregator is deemed to be the supplier of service,
an electronic operator has to collect tax on behalf of the original supplier of goods/
services. The thin line drawn between an aggregator and e-commerce operator for services
would be whether the services of the third parties are being rendered under the brand
name of the online portal. This is likely to lead to ambiguity for stakeholders (third
party service providers and the online platform) in determining their respective tax
obligations. The confusion could further spill over to a variety of sectors relatively
novel to the Indian economy, including online travel agents, marketplaces offering
specialized/ professional services and online sellers of digital products.

An important thing to note is that the present provisions for allowing the appointment
of an agent in India by an aggregator which does not have a presence in India does
not seem to find a place in the Model GST law. Similarly, under the present law,
e-commerce marketplaces having no presence in India are not required to obtain any
registration in India. However, the lack of clarity from this aspect of the Model
GST law has left many wondering whether aggregators and e-commerce players operating
outside India would need to register themselves in India under the GST regime merely
for taxation purposes. This inference, if true, could prove to be highly regressive
for various overseas operators who may need to re-look at their overall business strategy
simply to comply with tax provisions. Besides, this could open the room for various
tax and non-tax litigations for such overseas operators.

The provisions for an e-commerce operator require it to collect tax at a rate to be
notified on behalf of the supplier of goods/services at the time of making the payment
to them. Credit of such payment would be available to the supplier towards discharging
its output GST liability. Introducing such concept for e-commerce operators clearly
shows the intention of the Government to make online intermediaries accountable for
supplies made through their platform.
While the rationale for this move, i.e. to achieve improved tax compliance, is appreciated,
it would significantly increase the compliance requirements for e-commerce operators.
Further, this would also put the suppliers supplying goods/ services through an e-commerce
operators at a disadvantage vis-à-vis regular brick-and-mortar suppliers, which is
against the overall spirit of GST.

The biggest challenge that would arise for e-commerce operators would be to determine
the place of supply for various suppliers operating through their platform. While
the Model GST Law provides for the principles for determining the relevant State for
payment of tax, one cannot rule out the possibility of ambiguities and multiple interpretations
with respect to the place of supply. This could lead to a situation where tax has
been collected and deposited by an e-commerce operator in a State other than the State
where tax is paid by the main supplier. An associated issue would also be to determine
the manner for depositing the tax collected by an e-commerce operator for suppliers
having presence in multiple States. This could possibly create a need for the e-commerce
operator to register in each State where its suppliers are located.

While it would be premature to conclude on any of the aforementioned aspects, the
Government must be mindful of the possible anomalies while coming up with various
rules and regulations for implementing the Model GST Law. Provisions must also be
built to safeguard interests of small scale suppliers who may not have any tax liability
or may be operating under the composition scheme. The provisions for an e-commerce
operator should not lead to a scenario wherein suppliers are discouraged from operating
through e-commerce models on account of tax challenges. This would be against the
spirit of GST which is being seen as a tax regime which is aligned with various business
structures and is expected to bring in a regime wherein businesses can operate purely
on commercial factors rather than tax considerations.

Against the backdrop of India moving towards becoming ‘digital India’, the Government
finally seems to have given special recognition to the e-commerce sector under the
upcoming GST framework. While it is critical to ensure blocking of avenues amenable
to tax leakage, the compliance mechanism to this end should not be so stringent so
as to defy the overall policy intent for providing a thrust to online businesses.
The Government must engage in regular discussions with e-commerce players before finalizing
the law to find a middle path for achieving the intended objectives of all stakeholders
involved.

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